ENTREPRENEURSHIP DEVELOPMENT (MODULE-II1-B)

Edited by: MANAV SIR

(Faculty: PMEC & Research Scholar: Berhampur University)

Sickness in Small Enterprises.

Causes and symptoms of sickness – cures of sickness.
Govt. policies on revival of sickness and remedial measures.
Causes and symptoms of sickness:
Industrial Sickness
What is Industrial Sickness? An industrial unit tends to show signs of financial distress starting
with:
short term liquidity problems;
 revenue losses;
 operating losses; and
 moving in the direction of over use of external credit.
 until it reaches a stage where it is overburdened with debt and not being able to generate
sufficient funds to meet its obligation.
Which type of units are sick?
1. To a Layman:- A sick unit is one which is not healthy.
2. To an Investor:- It is one which is not giving dividends.
3. To a Banker:- It is a unit which has incurred cash losses in the previous year and is about to
repeat the same performance in current and following years.
4. To an Industrialist:- It is a unit which is making losses and about to close.
Industrial Sickness Definition:

In common parlance, a sick unit is one which is not healthy. Financial institution considers a unit
sick when it fails to meet its contractual obligation.
According to Sick Industrial Companies (Special Provisions) Act, 1985, a sick industrial
undertaking means, “an industrial company (registered for not less than seven years) which has
at the end of any financial year accumulated losses equal to or exceeding its entire net worth and
has also suffered cash losses in such financial year and the financial year immediately preceding
such financial year.”
1. According to RBI:- “A sick unit is that which has incurred a cash loss for one year and is
likely to continue incurring losses for the current year as well as in the following year and the
unit has an imbalance in its financial structure.”

2. According to SICA, 1985: “A unit was defined as “industrial company (being a company
registered for not less than seven years )which has at the end of any financial year accumulated
losses equal to or exceeding its entire net worth and has also suffered cash losses in such
financial year and the financial year immediately preceding such financial year”

3. Definition according to companies Act,2002:- Sick industrial company means an industrial

company which has – Accumulated losses in any financial year which are equal to 50 percent or
more of its average net worth during four year immediately preceding such financial year
Failed to repay its debts within any three consecutive quarter on demand made in writing for its
repayment by a creditor of such company

Signals and Symptoms of Industrial Sickness

Common symptoms of industrial sickness include failure to pay statutory liabilities like
provident funds and E.S.I. contributions, failure to pay timely installment of capital and interest
or loans taken from financial institutions and through public deposits, increase in inventories
with a large number of slow or non moving item, high rate of rejection of goods manufactured,
low capacity utilization and frequent industrial dispute.
Industrial units may become sick at different stages. Some industrial units are ‘born sick’ some
achieve sickness and some of them have sickness thrust upon them. Following factors may cause
the signals of the industrial sickness –

1. Failure to Pay Statutory Liabilities: Financial management causes failure to pay statutory
liabilities like provident funds and E.S.I. contribution.
2. Increase in Inventories: Poor inventory management in respect of finished goods as well as
inputs put unit in a trouble and the result is sickness inventories.
3. Failure to Pay Loan: Industrial units fail to pay timely installment of capital and interest on
loans taken from financial institution and through public deposits. It is a major symptom of
industrial sickness.
4. Rejection of Goods: Due to the declaiming in technical efficiency rejection of the goods in
possible.
5. Others:
(i) Dealing in capacity utilization
(ii) Non submission of data to banks and financial institutions.
(iii) Frequent breakdowns in plants and equipments.
(iv) Irregularity in maintaining bank accounts.
(v) Frequent turnover of personnel in the industry.
(i) Persisting shortage of cash.
(ii) Widespread use of creative accounting.
(iii) Deteriorating financial ratios.
(iv) Continuous tumble in the price of the shares.
(v) Delay in the audit of annual account.
(vi) Degradation of employee morale and desperation among the management team.
(vii) Delay in payment of statutory dues.
External Causes:

• External problems relating to banks and other financial institutions:

a) Under-financing by banks
b) Over-financing by banks
c) Delay in disbursement of loans
d) Delay in detection of early symptoms of sickness
e) Delay in decision and action to rehabilitate the unit.
f) Others.

• Sickness made by government:

a) Change in government policies
b) Delayed in payment of bills by the government departments
c) Red-tapism by government officials
d) Others.

• External problems:
a) Raw-materials
b) Power
c) Marketing
d) Labour
e) Finance
f) Others
• Other external problems:
strikes, bandhs, insurgents, extortions etc.
1) Energy crisis
2) Irregular Supply Of Inputs:-
3) Infrastructural problems like transport bottlenecks;
4) Shortage of working capital / liquidity constraints;
5) Recession.
6) Artificial economic constraints
7) Official or Government Policy
8) Changes in Technology;
9) Change in consumer behaviour;
10) Fire, flood, other natural calamities
11) Other family problems
12) Social problems like

Consequences of IS:
Industrial sickness has been resulting in serious consequences in an underdeveloped labour
surplus economy like India. These consequences of IS include:
1) Adverse impact on society:- Aggravating employment problem, Lack of labour intensiveness,
high unsatisfaction rate due to closure of industrial units.
2) Fear of industrial unrest :- Widespread labour unrest, high unemployment rate, low
productivity,unfavour of trade union due to closur and threatening industrial environment of the
country.
3) Wastage of resources:- Wastage of huge resources invested in these sick units, lack of
infrastructure facilities, block of capital equipment.
4) Adverse impact on related units: Adverse impact on related units through backward and
forward linkages. For e.g.Channel breakdown between industries; Impact on suppliers; Impact
on distributors;
5) Adverse effect on investor & entrepreneur:- Low satisfaction of investor; Negative effect on
the same line new entrepreneur; Effect on the growth rate of industry, due to widespread closure
of units.
6) Losses to banks & financial institution:- Causing hugelosses to banks and other term leading
institutions and locking up huge funds into these sick units. For e.g. low recovery rate of banks &
institution; loss image in the market; lack of financial support for new industries.
7) Loss of revenue to Government:- Resulting huge loss of revenue to both Centre, State and
Local govt.
 Remedial Measures to deal with the problem of sickness: (CURES OF SICKNESS)
Industrial sickness is a serious problem faced by the country at present. This affected the health
of industries working under both public and private sector. Thus in meantime various incentives,
conclusions. doles etc. has been offered to these sick units for their revival. These measures for
revival and rehabilitation are discussed below:
Steps taken by banks
 Giving adequate working capital when there is shortage

 Recovery of intereast reduced rate

 Defining the special cell in the RBI

 Arrange the special Committee of state level in the local branch for link between agency

Policy framework of the Government

 SWOT analysis of industry

 Liberalization of sick industrial

Concessions by the Government

 Giving high facilities to large industries to take over the small sector for revival

 High liberalization in terms of financial rather than intervention

 Introduce the scheme for sick industry

 steps for detecting sickness early
 Corrective actions taken by RBI

The industrial investment bank of India

 Set up the IRCI(Industrial Reconstruction Corporation of India)

 Convert IRCI into IRBI in March 20,1985

 Convert IRBI in to IIBI March 27,1997

1. Measures taken by Banks:-

In order to revive and rehabilitate the sick industrial units, the commercial banks granted various
concessions to these units which include:
1. Granting additional working capital;
2. Recovery of interest at reduced rate;
3. Freezing a part of understanding in the accounts of these units;
4. Sick industrial undertaking cell;
5. State-level inter institutional committees;
6. a standing co-ordinating committee(constituted by RBI) from coordinating various issues
related to commercial banks and term leading institutions
7. defining the special cell within rehabilitation finance division of IDBI;

2. Measures taken by Government:-

In order to deal with problem of IS, the government laid down various guidelines Oct 1981 for
guidance of administrative machineries. The main features of these guidelines are: Features:
a) The administers ministers in government has been given specific responsibility for taking
remedial action and preventing IS.
b) In order to take corrective actionfor preventing incipient sickness, the financial institution will
strengthen the monitoring system and may take over the mgt of unit for its revival.
c) whenever the bank and other financial institutionfails to prevent sickness of a sick unit
thereafter reporting the matter to govt. they recovery their outstanding dues with normal banking
procedure;
d) In order to nationalise the undertaking, the mgt of the unit may be taken over under the
provisions of Industries(Development and Regulation) Act, 1951 for 6 month period;

3. Concessions provided by the Government:-

The govt has also made provision for certain concessions for assisting the revival process of sick
units. These include:
a) Tax benefit to healthy unit who taking over sick units for its revival(amendments of income
tax act in 1977 by adding sec 72A).
b) Introduction of margin money scheme for revival of sick units in Jan 1982;
c) Introduction of liberalized margin money scheme in June 1987 for high liberalizations in
terms of financial rather than intervention. The amt of assistance was raised from 20,000 to
50,000.

4. Industrial Investment Bank of India(IIBI):

In order to revive and rehabilitate sick units government set up the IRCI (industrial
reconstruction corporation of india) with its authorized capital of 2.5 crore.
Features:
a) For provide financial assistance, managerial and technical assistance;
b) Secure assistance from other financial institutions and government agencies for revival of sick
units;
c) Provide merchant banking services for amalgamation, merger etc;
d) Conversion of IRCI into a statutory corporation named IRBI in March 20 ,1985(authorized
capital of Rs 200 crores & paid up capital of Rs 50 crores) e) Conversion of IRBI into IIBI in
march 27, 1997

5. Steps for Early Detection of Sickness:

1) In order to detect sickness of those co’s for those who are not covered under SICA,1985,
corrective steps has been taken by RBI : Features: a) Giving advice to the banks in respect of any
industrial unit; b) Monitoring certain industries through its standing committees;
2) Exice Loan: Introduction of excise loan policy by govt in October 1989 for the grant of excise
loan to weak and sick industrial unit. As per the scheme the selected units will become eligible
for excise loan upto 50% of the excise duty paid by unit for last 5 years

6 . T A K E O V E R P O L I C Y
•REDUCING LIABILITIES
•GRANT LOANS AT CONCESSIONAL RATES
•PRIORITY IN SUPPLY OF RAW MATERIAL
•PROFESSIONAL SERVICES
•TAX EXEMPTION
•MERGER

PREVENTIVE MEASURES AND ROLE OF CONCERNING AGENCIES

The prevention of sickness cannot be the sole responsibility of any one agency. It is to be
checked at various stages by developing close and continuous dialogue with each other through
effective communication. The preventive measures can be taken individually or jointly by having
discussions and consultations. In preventing the sickness, therefore, the role of the following
agencies has been identified with respective distinction
• Term Lending Institutions
• Commercial Banks
• Entrepreneur
• Government
These agencies can effectively stem the sickness if they make use of signals and symptoms that
are generated by the industrial unit in its working and by using information and reporting system
of important key parameters of the industrial enterprise.

1. Role of Term Lending Institutions

The task of the term lending institutions to avert sickness commences with the identification of
the sick unit. Many industrial projects are born sick because either proper appraisal has not been
done, or market survey has not been carried out while sanctioning term loan to an entrepreneur.
The role of term lending institutions in the prevention of sickness may be discussed as under:
Appraisal of Management
The terms lender can forestall more than fifty percent chances of sickness, if he evaluates
properly the management of the project. A competent and vigilant management can be expected
not only to find solutions to the day to day problems of the unit, but also to anticipate the
problems to be and take timely steps to avoid them. Management evaluation is a difficult task but
with experience, a term lender would develop the sixth sense to differentiate between a desirable
and undesirable entrepreneur. The term lender can always obtain reports of the prospective
borrowers from bankers and other known sources, particularly regarding his antecedents and
business reputation.
Banning Industries Not Having Scope
There are certain industries which are on the decline, irrespective of the state of economy. The
sound manufacturers with a vision may take measures well in advance, to avert any disaster
through diversification or modernization as the situation may require. Others, either oblivious
about the likely change or unresponsive to it, with the result that sooner or later the industrial
undertakings develop sickness. In such a case, the term lending institutions can render timely
help by identifying those industries or industrial products, where sickness seems to be emerging
due to decline in demand, or where supply has outstripped demand perceptibly, and to publicize
this information, they can help in two ways,
First, to forewarn and dissuade potential entrepreneurs from stepping into these industries, or
impose ban on industries not having scope by putting them on banned list,
Second, avoiding creation of additional capacities. Whenever an entrepreneur markets only one
product for a particular customer, the unit runs into problems because customers change their
demand in midstream. In such a case, market survey can be conducted by the term lending
institutions and prevent the potential entrepreneurs not to establish those unit, or change the line
of production in case of established unit.
Machinery & Equipment
At times, the project is based on second hand machinery. Such a project can easily become sick
if the reconditioning of the second-hand equipment is not satisfactorily done or the technicians to
install the equipment are not available at required time. Extra efforts has, therefore, to be
exercised by the financing institutions to ensure that the second-hand equipment would have a
reasonable long life after reconditioning, and in case of any deficiency in the equipment, ready
assistance from the sellers would be available.
Satisfactory Implementation
Time element is all important in the implementation of a project and the term lender has to
ensure that all avoidable delays at the appraisal stage and during the disbursement of the
sanctioned assistance are eschewed scrupulously. Prompts action during these stages would not
only result in the implementation of the project without overruns and on schedule, but would also
establish proper rapport between the term lender and the entrepreneur, it is so essential for the
term lender while monitoring the project later. It must be emphasized that promptness is not to
be achieved at the cost of proper appraisal of the project, or by making disbursements without
observing the usual precautions. In fact, a good appraisal is the other important step that a term
lender has to take to forestall sickness in the unit.
2. Role of Commercial Banks
A commercial bank is of vital importance to an industrial unit as it provides to the unit liquid
resources needed to keep the unit going. Their everyday dealing with sick units enables them to
be closer to the operation of the unit and read their pulse. Thus, commercial banks can detect
early warning signal of sickness and, thus take, like suitable and timely action to prevent the
incidence of sickness. The main elements of the sickness prevention system at the bank level are
as following:
Careful Proper Appraisal
A careful proper appraisal of the project ensures not only its success but the banker's interest is
also safeguarded. With the shift from security oriented lending to purpose – oriented lending, the
study of the viability has become more vital while financing a project. It is, sometimes, found
that the credit appraisal capabilities of branch managers have been absolutely inadequate because
of rapid expanding branches of commercial banks. Mostly they apply a conservative and
traditional approach while assessing the requirement of working capital finance. As a result,
units are under financed and are, therefore, forced to operate at sub optimum level. Moreover,
the technical and marketing feasibility of the project are taken for granted without doing
analytical study at their own level. Banks should refuse to finance those projects which are not
viable, and assessment of working capital requirement should be done with the co-operation of
term lending institutions. There should be continuous training programme for branch managers
to upgrade their appraisal capability. The efforts should be made to appraise the project on merits
alone and in a very objective manner, without accepting any external influence.
Timely disbursement
Banks have to ensure that working capital finance should be available in time as far as possible
to avoid overruns in project cost. Though, it is observed that sometimes the delay may occur due
to the entrepreneur who fails to fulfill all the formalities such as submitting all the required
documents and replying to the queries of the branch manager in time, yet it has been noticed that
the fault lies with the banker who has to obtain the permission of and appraisal from different
authorities, and lays stress more on acceptance of security as the second charge from term
lending institutions on fixed assets, or personal guarantee against personal assets. Any delay in
disbursement may invite several other difficulties except increase in project cost, such as the
entry of new competitors, the non-availability of scarce raw materials, delay in supply of final
product in time.
Feedback from Commercial Banks
It may go a long way in detection/prevention of incipient sickness if the term lender and the
commercial banker realize that they are the two wheels on which the project cart has to proceed
to success and that success can be achieved only if both of them function in unison. If one of
them tries to strengthen its position at the cost of the other, or keeps away any information about
adverse developments in the unit, eventually both will suffer as also the unit itself. There is a dire
need for co-operation between the two lenders from the very inception of the project, and it has
to be continued throughout the life of the project.
Warning Signals
If the drawings in the account exceed the permissible drawing power continuously over a period,
the banker can safely conclude that the customer is short of funds. If the account runs
consistently in excess of the sanctioned limit, the customer might be indulging in over-trading. If
the bills drawn by the seller on his buyers are retuned unpaid, it may be pointer to the
unacceptability of the end- products of the unit in the market. It can as well be said that a good
look at the ledger account of a customer (bank's) by an experienced banker can throw a flood of
light on the state of the business of the customer-at least, reveal enough for the banker to knit his
eye-brows.
Market Intelligence
The apprehensions raised by the scrutiny of the ledger account can be counter – checked by the
banker with market intelligence, which he has perforce to build in his system of working. Only
when and if the market reports corroborate the banker's earlier apprehensions raised by the ledger
account, the banker need commence action to arrest impending sickness. An innocuous visit to
the unit by the banker might help in crystallizing the picture further.
Stemming Sickness
Discussions with the entrepreneur could be the first step in the desired direction provided the
intention is to help the entrepreneur to come out the difficulties. Any undue pressure at this stage
to recover even a part of the banker's dues and/or to strengthen the security is bound to
complicate the existing unsatisfactory situation and also prompt the customer to keep bank the
information regarding adverse developments. Normally, provision of additional finance/credit,
reduction in the prescribed margin and some latitude in repayment of the over dues would help in
remedying incipient sickness.

3. The Role of the Entrepreneur

In a way, it should be the sole responsibility of the entrepreneur, who commences, implements
and manages the project, to avert sickness in the unit set up by him. This can normally be done if
the entrepreneur does his homework properly while drawing up the project, if he pays adequate
attention to the deficiencies pointed out by the appraising officers of the financial institutions, if
he selects the suppliers of machinery and process carefully, if he appoints the financial and other
staff in time, if he affects economy to keep the project cost within the original estimates and
implements the same according to the time schedule. The main elements of the sickness
prevention system at the entrepreneur level are as follows:
Management Board
The industry should have a board with competent persons from all disciplines needed to run the
unit successfully, appoint a dynamic chief executive to implement the policies formulated by the
board and ensure a proper second line of defense by appointing professional go-getters. And
above all, at the first sign of any adverse development in the unit, he should take his banker and
term lender into confidence. Fortunately, the old thinking of the bankers to "put on the heat"
when the borrowers are in difficulties, is being gradually replaced by a desire to understand the
problems of the entrepreneur when he faces crisis and to find solutions so that the unit function
smoothly.
Partners in Enterprise
The term lenders consider themselves as partners in the enterprises (as shown below) being
managed by the entrepreneur and are fully conscious that the recovery of their lent funds depend
on the capability of the unit to generate surpluses.

1. Solvency of Individual
2. Security of Collateral
3. Profitability & Viability of Project
4. Entrepreneurial Capabilities
5. Partnership Responsibilities
6. Awareness or Sickness Warning
In the circumstances, the entrepreneur can freely confine his problems to the lenders and make
use of their expert advice in averting sickness before it is too late.

4. The Role of the Government

The Government can help in controlling sickness by not making sudden and frequent changes in
the industrial policies. It has to be appreciated that setting up of an industrial unit is an
investment decision, which has to take into account further returns.
Sudden changes in industrial policy
When several changes are made successively in the industrial policy by the government, it not
only may discourage new investment but also upsets further plans causing sickness in the
established units. Withdrawal of subsidies can also result in sickness. It would be only in the
fitness of things if the term lenders, who are expected to know the pulse of each industry
financed by them, are taken into confidence by the government, before effecting any major
modifications in the industrial policy. The financial institutions and the representatives of
industry can also be prompted to come together occasionally with or without government
participation with a view to discussing the problems of the industry in general or of any
particular industry and evolving solutions including recommendations to the government to
modify its existing policies.
Resistance to change
The law as it stands today does not empower the term lenders to make changes in the
management of an assisted unit even when they are convinced that incipient sickness in the unit
is entirely due to the incompetence and/or dishonesty of the existing management and it is
apparent to them that without a change in management, the unit would soon become chronically
sick. Strangely enough, when the management is efficient and honest, any changes suggested in
the management by the lenders are readily accepted but a management which is not above board
usually resists management changes. Power to change
It would be a greater help if the apex term lenders are vested by the government with powers to
make management changes in units assisted by the public financial institution when it is proved
to its satisfaction that sickness in a unit has set in and the same can be attributed entirely/mainly
to deficient management. In particular, term lenders may be authorized to appoint in units
suffering from incipient sickness whole time financial, technical and marketing directors. Such
directors, of course, would have to be empowered to report to the financial institutions and also
given immunity from penalties for acts done in good faith. Term lenders can be required to
prepare a panel of experienced persons, who could take up such challenging assignments, while
retired officers from the public and private sector with adequate background could be one source
for building up such a panel. In order to get rid of the disease of industrial sickness and restore
the health of the affected units, there is an imperative need that the government and the related
agencies should come forward to meet the challenge. They should adopt strategic and pragmatic
approach. As far as possible, stern legal and economic measures should be adopted to check
further spread of sickness and assist the unit in their rehabilitation bid. Modernization and
rationalization should be commonly used. These units should be pressurized and persuaded to
utilize sophisticated machinery and innovative technology. Besides, banks the financial
institutions, should also come forward to rescue these units through their liberal loan policies.
These institutions should keep a watch over the ways of the utilization of awarded loan facilities.
Banks should also assess the progress of such units, which are facing crisis, from time to time. It
is presumed that if such a state of affair is not checked and timely action is not taken the
increasing incidence of industrial sickness will further aggravate the situation and hamper the
growth of industrial sector.

Government policies on revival of sickness an remedial measures

Government Policy to Deal with Industrial Sickness:
The policy framework in respect of measures to deal with the problem of industrial sickness has
been laid down in the guidelines issued in October 1981 (which were subsequently modified in
February 1982) for guidance of administrative ministries of the Central Government, State
Governments, and financial institutions.

The Central Government has set up a Board for Industrial and Financial Reconstruction
(BIFR) with effect from January 12, 1987 in pursuance of enactment of the SICA—Sick
Industrial Companies (Special Provisions) Act, 1985. This is a major step for intervening at an
early stage and detecting, preventing as well as taking ameliorative, remedial, and such other
measures which need to be taken with respect to sick and potentially viable companies.

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated various steps for
checking the growth of industrial sickness and helping in industrial revival. The IRBI was taken
over by the Industrial Investment Bank of India in 1997. It functions as the principal credit
and reconstruction agency for industrial revival. A significant measure taken during 1986 was
the setting up of Small Industries Development Fund (SIDF) in the IDBI. This is meant to
provide special financial assistance to the small-scale sector.

10.3 BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR)

Board of industrial and Financial Reconstruction (BIFR) was established by the Central Government,
under section 3 of the Sick Industrial Companies (Special provisions) Act, 1985 and it became fully 358
Project Management operational in May, 1987.
BIFR deals with issues like
 Revival and rehabilitation on sick companies,
 Winding up of sick companies,
 Institutional finance to sick companies,
 Amalgamation of companies etc.
BIFR is a quasi judicial body. The role of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is:
(a) Securing the timely detection of sick and potentially sick companies
(b) Speedy determination by a group of experts of the various measures to be taken in respect of the
sick company
(c) Expeditious enforcement of such measures BIFR has a chairman and may have a maximum of 14
members, drawn from various fields including banking, labour, accountancy, economics etc.
It functions like a court and has constituted four benches.

Under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 [SICA], the
reference made by the sick industrial company is decided by the Board for Industrial & Financial
Reconstruction (BIFR) The Legislation is basically and predominantly remedial and ameliorative in
so far as it empowers the quasi judicial body, Board for Industrial and Financial Reconstruction
(hereinafter also referred to as BIFR) to make appropriate measures for revival and rehabilitation of
potentially viable sick industrial companies and for liquidation of non-viable companies.

If a corporate debtor is in difficulty it is likely that he would approach the senior lenders for some
rehabilitation, waiver of compound or penal interest, funding of the interest dues on a zero coupon
rate or at concessional terms. It would prepare a scheme of arrangement or rehabilitation plan with
the assistance of experts or an advisor after making reference to BIFR.

Whether a Company has become sick can be decided only after accounts are finalised and audited.
After the accounts are finalised, Board of Directors of the sick industrial Company must make a
reference to BIFR within 60 days after finalisation of accounts. If Board of Directors are of the
opinion that the Company is a sick industrial company, Board of Director can make a reference even
before finalisation of accounts. [section 15(1) of SICA].

Who can obtain relief under BIFR?

Applicability of and Coverage of SICA – The Act extends to whole of India. The Act applies to
‘Industrial Undertakings’ as defined in section 3(1)(f), which states that;
The ‘industrial undertaking means any industrial undertaking pertaining to industry listed in schedule
to Industries (Development and Regulation) Act. This schedule covers practically all industries and
hence, the Act in reality applies to all industries, except shipping industry. The Act applies to
Government as well as private undertakings. However, the Act does not apply to cooperative
societies and units owned by a trust. The SICA does not apply to small scale industries (SSI). SICA
has overriding effect – Provisions of SICA have overriding effect over provisions contained in all
other laws, memorandum and article of company and any other instrument, except provisions of
Foreign Exchange Regulation Act (FERA) and Urban Land (Ceiling and Regulation) Act (ULC)
[section 32(1) of SICA].

Criteria for Seek Industrial Company?

(a) It should be an industrial company
(b) It should be registered for at least five years – A company usually makes losses in initial years
and hence, initial losses do not mean that the industrial company is sick.
(c) At the end of financial year, accumulated losses should be equal to or more than its entire net
worth

What are the reliefs on reference to BIFR?

Under SICA creditors of a sick company are prevented from enforcing their remedies in a court of
law subject to stay or moratorium in the following classes of proceedings
a. Suit for recovery of money
b. Suit for enforcement of any security
c. Suit for enforcement of any guarantee in respect of any loan or advance granted to the company
d. Execution against companies properties
e. Proceedings for distress against such properties
f. Similar other proceedings against such properties
2. No creditors of the Company can initiate any kind of legal proceedings against the Company or
against the assets of the Company for recovery of its dues in case such Company is before
BIFR/AAIFR under the provisions of SICA till pendency of such reference or till obtaining leave of
BIFR/AAIFR to do so.
3. However the priority of claims does not get adversely affected

Role of BIFR?
On receipt of reference from the Company, BIFR will inquire and determine that whether applicant is
sick industrial company or not and after such determination, it may appoint operating agency(e.g.
panel of banks, public financial institutions) to come up with Draft Rehabilitation Scheme as
prepared in consultation with the Sick Industrial Company for the purpose of revival and
rehabilitation of such company or it may ask for winding up of Sick Industrial Company if its not
possible to revive the company.

Scope of our Services?

1. Filling reference/ application for on behalf of the Company
2. Preparation, assisting and Consulting in Drafting of Rehabilitation Scheme(DRS)
3 .Advising measures in the terms of Corporate Restructuring under the DRS
4. Preparation of Modified Draft Rehabilitation Scheme
5. Filling Miscellaneous applications with BIFR
Procedure:
Reporting to BIFR
Inquiry by the BIFR
Rehabilitation of SSI unite
Viability of sick SSI units
Relief and concession for rehabilitation of potentially viable units
Delegation of power
Relief and concession under rehabilitation
Interest dues on cash credit and term loans
Unadjusted interest dues
Term loans
Working capital term loans
Cash losses
Working capital
Contingency loan assistance
Funds for startups expense and margin for working capital
Promoter’s contribution

Details:
Reporting to the BIFR
The Board of Directors of a sick industrial company is required, by law, to report the sickness to the BIFR
within 60 days of finalisation of audited accounts, for the financial year at the end of which the company
has become sick. BIFR has prescribed a format for this report. While reporting by a company of its
sickness to the BIFR is mandatory as per the provisions of law, any other interested person/party can
also report the fact of sickness of a company to the BIFR. Such interested parties may be the financial
institution/bank that has lent loan to the company, the RBI, the Central/State Governments. The BIFR
has prescribed a different format for the report to be submitted by such interested parties. When a
company has been financed by a consortium of banks, it is the Lead Bank that should report to the BIFR
about the sickness under advice to other participating banks in the consortium.
Enquiry by the BIFR
When a case is referred to the BIFR, it is verified by the Registrar of the BIFR as to whether the facts of
the case falls within the provisions of the Sick Industrial (Special provisions) Act, 1985. If so, the BIFR
accepts the case and notifies a date for hearing the case.
For rehabilitating a sick unit, cooperation of various connected agencies is a must. This co-ordination is
achieved by the BIFR.
The BIFR invites the representatives of the informant sick company, the representatives of concerned
financial institutions and commercial banks, representatives of the Central/State Governments, trade
union representatives etc., to the hearing and inquiry is made under section 16 of the Act.
After the hearing, the BIFR itself may conduct a study or entrust the work to an ‘operating agency’
appointed by it to determine whether the company is in fact sick.
Normally, the lead financial institution (IDBI, ICICI, IFCI, SFC) or the lead public sector bank that has
financed the company is nominated as the operating agency. Lead institution is one that has major
financial stake in the sick company. The enquiry is to be completed within 60 days. On completion of the
enquiry, the BIFR will declare whether the company is sick or not.
Revival Package
Once a company has been found sick, the BIFR may grant time to the sick company to enable it to make
its net worth positive and bring the company out of sickness, without any external financial assistance.
If it is found infeasible for company to make its net worth positive without any external financial
assistance, or if the BIFR decides that the company can not make its networth positive Rehabilitation of
Sick Units 359 within a reasonable time, the BIFR will direct the operating agency to prepare a suitable
revival package for the restoration of the health of the company.
The operating agency prepares a suitable revival package. The revival package may vary from case to
case depending on the nature of the problem and may include
 additional financial assistance,
  postponement of recovery of loan already lent by banks and financial institutions,
 change in management,
 amalgamation,
 sale of redundant assets,
 lease of assets or any other suitable measure.
The revival package should be submitted to the BIFR within a time limit of 90 days or such extended
period as may be granted by the BIFR.
On submission of the revival package by the operating agency, the BIFR sends the revival package in a
draft form to all the interested parties (i.e., the sick industrial company, the banks/ financial institutions
who have given financial assistance to the sick company, the operating agency, the transferee company
(if there is a recommendation in the revival package for amalgamation) etc., eliciting their
views/suggestions on the revival package.
The BIFR will also publish particulars of the draft revival package in newspapers inviting
suggestions/objections, if any, from the shareholders of the sick company, creditors and employees of
the sick company, transferee company and any other interested party.
On receipt of views/suggestions/objections on the draft revival scheme, the BIFR may, if deemed fit,
afford an opportunity to the interested parties to be heard. After careful examination of all the aspects,
the BIFR will sanction the revival scheme with or without any modifications. The scheme, as sanctioned,
will come into force from the specified date and all the concerned parties are required to abide by the
provisions of the revival scheme.
The BIFR may also order the operating agency to implement the sanctioned revival scheme. When the
revival package as finalized by the BIFR contains further financial assistance or reliefs, concessions,
sacrifices etc. (for example, sanctioning of additional financial assistance for the purchase of certain
balancing equipments, waiving of penal interest/compound interest charged, waiving of interest in part
or full, waiver from sales tax etc.) the scheme will be circulated to the concerned agencies for their
consent to be received within a period of 60 days. Once the various agencies involved in the revival
scheme give their consent to the scheme, it will become binding on the consenting parties to implement
the recommendations contained in the revival scheme. However, when any of the involved agency does
not give its consent to the scheme, the BIFR has no powers to force the agency to accord its consent. If
in the opinion of the BIFR, the revival package can not be successful with out the consent from one or
more of the agencies involved, the BIFR has no other option but to recommend for winding up of the
company. In fact, the threat of actual winding up of the company is the only weapon in the hands of the
BIFR to make the various agencies to extend suitable reliefs and concessions as may be deemed
necessary by the BIFR. BIFR itself cannot initiate the winding up proceedings. It can only forward its
opinion to the concerned High Court and the High Court will initiate the winding up proceedings.